The UK Government have already had one go at addressing the ‘low pay anomaly’ resulting in HMRC’s obligation to make a Low Earner’s Pension Payment. Further Regulations address some of the holes from the original legislation.
It is an operational reality that the tax relief on pension contributions may be different if a low earner is in a Net Pay Arrangement (NPA) pension scheme rather than one that operates Relief at Source (RAS):
- In a NPA tax relief pension scheme, pension contributions are deducted from earnings before Income Tax is calculated. So, tax relief will only be available if the employee pays tax, something that may not happen is earnings are below the Personal Allowance;
- In a RAS tax relief pension scheme, pension contributions are topped up by Income Tax at the Basic Ratem regardless of whether they have an Income Tax liability
For low earners, therefore, individuals NPA schemes receive less tax relief for pension savings than those in RAS schemes. Finance (No. 2) Act 2023 inserted Section 193A into Finance Act 2004 to address this anomaly from tax year 2024/25 and onwards. This requires HMRC to assess whether individuals have received less tax relief as a result of the tax relief mechanism operated by their employer. If so, HMRC will make a Low Earner’s Pension Payment – from sometime in 2026, as this has been delayed.
However, the legislation did not fully address the anomaly and the requirement for HMRC to make a Low Earner’s Pension Payment. Some taxpayers who are disadvantaged may not have been in scope and the anomaly would have remained. The Registered Pension Schemes (Net Pay Arrangements) Regulations 2026 does two things:
1. It broadens the scope of individuals who will be impacted and, therefore, will be entitled to the Low Earner’s Pension Payment from HMRC; and
2. It removes the Payment from being treated as taxable income
For Bookkeepers
This does not affect employers but may affect individuals in NPA tax relief pension schemes who may not be receiving tax relief simple because they are not earning at a level to pay Income Tax.
These individuals will be contacted by HMRC based on records they have. To receive the Payment, individuals will have to accept HMRC’s calculation and provide bank details.